Central Banks exempts sugar imports from cash cover minimum

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CAIRO: In light of the recent rise in sugar prices reaching LE 5000 a ton and contributing to higher inflation, Egypt’s central bank said on Saturday it was exempting banks from a 50 percent cash cover requirement on sugar imports for a period of six months.

The move came after an earlier decision taken in June 2010, which reduced the cash cover cap for the importers of sugar from 100 percent to 50 percent.

According to Ahram, the state-run daily, the central bank’s decision gave banks the authority to determine the appropriate cash cover for their clients and make decisions and assessments of the risk of awarding credit based on its research.

Ahram said that the rise in sugar prices is a threat to some 70 percent of the smaller companies producing sweets and baked goods associated with the commodity. The rise in prices has also led to major corporations raising the prices of their products between 15 and 20 percent. This forces companies to reduce production capacity and could result in layoffs, exacerbating the unemployment crisis.

“The central bank’s decision does not come as a surprise, as the government often takes similar temporary decisions to tame increases in domestic prices and to ensure the availability of a product in the local market (e.g. the export ban on rice and the recent exemption of frozen meat and chicken from the minimum cash cover for a six months),” said investment bank Beltone financial in a statement.

Dr. Ahmad Rakaibi, the head of the Holding Company for Food Industries, told Ahram that the decision of the Central Bank was good for sugar intensive businesses as the cash cover was an impediment for companies, making it harder for them to acquire finances.

He added that he expects Egypt to require imports of 1.2 million tons of sugar during the next year, stressing that importing companies were required to cover 50 percent of the value of the imports.

However, in light of the latest decision of the Central Bank, the sugar companies are not required this coverage exempting them of billions of pounds, and increasing their ability to import and therefore, supply in the market.

“The prices of sugar in the domestic market have been on the rise since September, contributing, significantly, to the monthly headline, as well as core inflation (as sugar and confectionary are included in the core index). Together, sugar and confectionary (representing around 2 percent of CPI), have risen 1.1 percent, 1.6 percent and 1.8 percent, respectively, on a monthly basis, over September, October, November, while the year-on-year increase has averaged 9 percent over the same three months,” the Beltone statement adds.

Beltone said that the domestic price increase is the result of a notable rise in the international prices of sugar in the second half of 2010, on weak harvest in key sugar exporting countries such as Brazil, India and China. The statement said that while they expect the decision to facilitate the availability of the food item in the local market, taming prices, and thus limiting sugar price increases impact on inflation, it will remain subject to the prevailing international prices.



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